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The China coal-to-gas effect

The country's policy to cut coal production capacity has sent prices around the globe soaring. It’s good news for Europe's decarbonising efforts

Coal-to-gas switching in Europe's power sector has surged as more Chinese coal buying and some supply outages pushed coal prices higher. In 2014 and 2015 China's coal demand contracted as economic growth slowed and the government implemented measures to curb pollution. Meanwhile, the country's soaring coal output exacerbated a global supply glut.

But this year China has taken steps to reduce the overcapacity by pledging to close 0.5bn tonnes over the next three to five years-a 15% cut on 2015 levels.

The cuts have filtered through to European coal prices. Rotterdam coal futures have risen from around $47.85 per tonne in mid-October 2015 to almost $74/t at the same time this year. Between September and October alone futures in Europe gained almost 20% and further along the curve prices are looking even better-supported. Shipments for delivery in Q1 2017 were trading at over $76/t as ­Petroleum Economist went to press.

According to consultancy Timera Energy coal prices will remain at around $65/t throughout 2017, which will continue to support coal-to-gas switching in Europe as an abundance of gas will keep prices competitive. The rally in the coal forward curve has supported a 40% rise in 2017 power prices in Germany, the consultancy says. In early October, they surged to above €30 per megawatt hour, up from around €21/MWh in Q1.

Similar price rises have occurred across other continental European power markets where coal use has increased, including France (normally reliant on nuclear) and the Netherlands (where gas has tended to dominate).

Prices for imports of liquefied natural gas should fall next year as an influx of cargoes from the US heads to the continent. Energy Aspects expects European LNG imports to soar by 44% in 2017, reaching 72.5m tonnes, compared with 41m tonnes this year. In 2018, the number will reach 97.7m tonnes, the consultancy estimates.

LNG influx: European import forecast (m t). Source: Energy Aspects
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